There’s been a lot of discussion about the causes of our current financial crisis. I, for one, do not ever care to hear the Wall Street/Main Street framing again. Really, is that the best we can do? Have we no sense of language?
The “credit contraction” or “credit crunch” involved, among other things, financial institutions that were “shot through with short-termism, deceptive practices and self-dealing.” I can’t help but think that unrestrained (dare I say “unregulated”?) greed is at the root of quite a lot of what has happened.
In this regard, one thing I haven’t really heard much about lately are the predatory mortgage lending practices that have flourished under this administration. Predatory lending practices are abusive, stripping borrowers of home equity and threatening families with bankruptcy and foreclosure.
Abusive loan practices include:
- Intentionally steering you to a higher cost loan when you qualify for a lower one
- Putting you into a loan you cannot afford based on your income or assets
- Charging high interest rates and fees
- Breaking verbal promises & terms or “bait and switch” at closing (we saw this one ourselves in the difference between the “good faith estimate” and the reality of the mortgage payment amount)
- Getting inflated appraisals to loan you more than your home is worth
- Loans with balloon payments
- Coaching you to lie or be dishonest on your loan application
- Putting you into a “stated income” or “no document loan”
- Loan “flipping” or constant refinancing
- “Hard Money” lending
- Loans with payments that start low and go high (my student loan does this)
- Including prepayment penalties
- Failing to properly credit loan payments in a timely way
- Charging escrow fees when not provided by the note or deed of trust
- Issuing loan payoff statements full of inflated and improper fees
Let me tell you about the practices that have led to the ballooning of my student loan debt… but no, if I think about it I get heart palpitations and I’m already not feeling well today.
Something that seems to have made everything worse was the overturning of some regulatory safeguards. For some, the spotlight for this is on Sen. Phil Gramm, McCain campaign adviser and a lobbyist for a Swiss bank:
Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain’s presidential campaign and advises the Republican candidate on economic matters. He’s been mentioned as a possible Treasury secretary should McCain win. That’s right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure.
I’m interested in the fact that there is very little real discussion (that makes any sense to me, anyway) about the effects of abstract speculation (gambling), or in the practices of usury (it used to be considered a sin) that surround every consumer every day.
Institutions that put too much of their working capital on the line with speculation and excessive risks went down – and shouldn’t they? But we’re so interconnected anymore that the markets have become like clusters of artificial intelligence with everything affecting everything else, so what can be done?
Paul Krugman usually has something interesting to say:
Paulson grabbed hold of the wrong end of the stick — he should have been seeking to expand bank capital, taking an ownership share in compensation, rather than trying to push up the value of toxic paper.
I just don’t know. A couple of days ago, my bank Wachovia was aquired by… Citi. Since I swore several years ago never to deal with them again, I turned to Washington Mutual (WaMu). Oops! Too late.
Meanwhile, there was the whole inflation of house prices… and then its decline.
Some are blaming immigrants. Economic crisis brings out the scapegoating impulse. Some are blaming anti-racist policies. Some are blaming poor people.
Lots of blame to go around, for sure. Blame war, blame the national deficit and the resulting increase in the mind-boggling national debt, blame corporations who send their money to Dubai after landing lucrative if wasteful and corrupt contracts (not naming names or anything), blame inflation, the average household debt, rising energy and food and healthcare costs, more productivity for less wages, the class warfare from the super-rich to the middle class…
There were a lot of people here in Atlanta that were pushed out of their homes because the neighborhood values went up, and so did their taxes. In some neighborhoods here, you could send a kid to a rather nice college for the yearly tax bill. I would like to see some figures on how that escalated in newly-gentrified neighborhoods.
There was also the optimism about jobs that led to unrealistic assessments of homeowner affordability (what happened to the 30% of your income rule?). Add to this the emergence of the professional home-flippers. I think that took a toll among the middle class.
(T)he tanking real estate market “shifted from subprime loans made to borrowers with poor credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments.” Bloomberg reported that 3 million American homeowners are holding prime (or, actually, semi-prime) “alt-A” loans (don’t ask) worth about $1 trillion, or $150 billion more than the entire outstanding subprime market. As those loans — many of which were taken on investment properties by people expecting a nice, quick turnover — started to go belly-up, a panic ensued. …That posed a risk to the mammoth and wholly unregulated market in insurance on bad loans that had grown up around these new kinds of investments. The market in what are known as “credit default swaps” is of unknown size, but it’s estimated to be worth as much as $60 trillion, most of it essentially paper backed by too little in the way of hard assets.
I’m not an economist, and I must admit that I don’t understand all the complicated workings of the financial sector. I do, however, have a very deep suspicion toward this administration, and some of the family background alone on these topics is a little chilling before you even look at the real power-players like the visible Cheney (and the less-visible ones, too).
Document uncovers details of a planned coup in the USA in 1933 by right-wing American businessmen. The coup was aimed at toppling President Franklin D Roosevelt with the help of half-a-million war veterans. The plotters, who were alleged to involve some of the most famous families in America, (owners of Heinz, Birds Eye, Goodtea, Maxwell Hse & George Bush’s Grandfather, Prescott) believed that their country should adopt the policies of Hitler and Mussolini to beat the great depression.
In light of all I know and suspect about imperial neocons and fascists in our government, I do feel pretty secure with the strategy of tracking and analyzing the flow of capital and power if you want to understand what’s happening. And, in this regard, I’m rather fond of Noam Chomsky. This is what he had to say at a recent summit on the problems of Latin America and the Caribbean:
We might also take note of the striking similarity between the structural adjustment programs imposed on the weak by the International Monetary Fund, and the huge financial bailout that is on the front pages today in the North. The US executive-director of the IMF, adopting an image from the Mafia, described the institution as “the credit community’s enforcer.” Under the rules of the Western-run international economy, investors make loans to third world tyrannies, and since the loans carry considerable risk, make enormous profits. Suppose the borrower defaults. In a capitalist economy, the lenders would incur the loss. But really existing capitalism functions quite differently. If the borrowers cannot pay the debts, then the IMF steps in to guarantee that lenders and investors are protected. The debt is transferred to the poor population of the debtor country, who never borrowed the money in the first place and gained little if anything from it. That is called “structural adjustment.” And taxpayers in the rich country, who also gained nothing from the loans, sustain the IMF through their taxes. These doctrines do not derive from economic theory; they merely reflect the distribution of decision-making power.
The designers of the international economy sternly demand that the poor accept market discipline, but they ensure that they themselves are protected from its ravages, a useful arrangement that goes back to the origins of modern industrial capitalism, and played a large role in dividing the world into rich and poor societies, the first and third worlds.
This wonderful anti-market system designed by self-proclaimed market enthusiasts is now being implemented in the United States, to deal with the very ominous crisis of financial markets. In general, markets have well-known inefficiencies. One is that transactions do not take into account the effect on others who are not party to the transaction. These so-called “externalities” can be huge. That is particularly so in the case of financial institutions. Their task is to take risks, and if well-managed, to ensure that potential losses to themselves will be covered. To themselves.
Under capitalist rules, it is not their business to consider the cost to others if their practices lead to financial crisis, as they regularly do. In economists’ terms, risk is underpriced, because systemic risk is not priced into decisions. That leads to repeated crisis, naturally. At that point, we turn to the IMF solution. The costs are transferred to the public, which had nothing to do with the risky choices but is now compelled to pay the costs – in the US, perhaps mounting to about $1 trillion right now. And of course the public has no voice in determining these outcomes, any more than poor peasants have a voice in being subjected to cruel structural adjustment programs.
A basic principle of modern state capitalism is that cost and risk are socialized, while profit is privatized. That principle extends far beyond financial institutions. Much the same is true for the entire advanced economy, which relies extensively on the dynamic state sector for innovation, for basic research and development, for procurement when purchasers are unavailable, for direct bail-outs, and in numerous other ways. These mechanisms are the domestic counterpart of imperial and neocolonial hegemony, formalized in World Trade Organization rules and the misleadingly named “free trade agreements.”
Hey, you knew I was a liberal, right?
I’m thinking about the Federal Reserve.
So, here’s a question for you: How much money is the U.S. government printing up right now? Can anyone give me a link to a chart that shows the history of that for the last ten years? I can’t find one -can you?